Technische Universität Berlin Berlin Institute of Technology Dissertation for the Degree Bachelor of Science in Economics Export Subsidies in a Strategic Trade Policy Approach under Asymmetric Competition with Reference to Agricultural Trade Faculty VII / School of Economics and Law Department for Microeconomics Prof. Dr. Radosveta Ivanova-Stenzel Supervised by: Dr. Thomas Giebe by Dawud Ansari (331913) May 2013 Eidesstattliche Versicherung Hiermit erkläre ich an Eides statt, dass ich die vorliegende Arbeit selbstständig und eigenhändig sowie ausschließlich unter Verwendung der aufgeführten Quellen und Hilfsmittel angefertigt habe. Berlin, den 08.05.2013 Dawud Ansari Abstract This dissertation does take a look at the frequently discussed issue of export subsidies. It reviews them in the classical situation of perfect competition and analyses thereupon possible situations in which export subsidies are beneficial for domestic welfare, based on the imperfect competition framework of Brander-Spencer model. After replicating their original results, this dissertation shows that the assumptions of increasing returns to scale and risk aversion in the presence of random supply shocks enhance the government’s incentive to subsidise the domestic exporting industry. The solely algebraic analysis focuses mostly on methods of comparative statics and examines the effects of a subsidisation on various variables. Diese Arbeit befasst sich mit dem vielfach diskutierten Thema der Exportsubventionen. Sie gibt einen Überblick über die klassische Sicht der vollständigen Konkurrenz auf sie und analysiert mögliche Situationen, in denen Exportsubventionen, basierend auf dem Brander-Spencer- Modell, vorteilhaft sind. Nach der Replikation ihrer ursprünglichen Ergebnisse wird gezeigt, dass steigende Skalenerträge und Risikoaversionen in der Gegenwart von Angebotsschocks den Anreiz für Regierungen erhöhen, den inländischen Export zu subventionieren. Die rein algebraische Analyse basiert größtenteils auf Methoden der komparativen Statik und untersucht den Einfluss der Subvention auf verschiedene Variablen. Table of Content List of Abbreviations .................................................................................................................................... iii Table of Figures .............................................................................................................................................. iv 1. Introduction ................................................................................................................................................. 1 1.1 Motivation .............................................................................................................................................................. 3 1.2 Outline & Methodology ..................................................................................................................................... 5 2. Export Subsidies under Perfect Competition................................................................................... 6 2.1 Equilibrium under Autarky ............................................................................................................................ 6 2.2 Free Trade Equilibrium .................................................................................................................................... 9 2.3 Introduction of an Export Subsidy ............................................................................................................ 12 2.3.1 Effects on Welfare ............................................................................................................................... 12 3. Modelling Export Subsidies under Imperfect Competition ...................................................... 16 3.1 General Assumptions and Structure ........................................................................................................ 16 3.2 Comparative Statics and Solution: Constant Marginal Costs ......................................................... 18 3.2.1 Cournot Subgame ................................................................................................................................ 18 3.2.2 Government Stage............................................................................................................................... 22 3.2.3 Consequences for Foreign Welfare .............................................................................................. 23 3.2.4 Quantification under Linear Demand ......................................................................................... 24 3.3 Comparative Statics under Falling Marginal Cost Structure .......................................................... 26 3.3.1 Welfare Effects and Government Decision ............................................................................... 30 3.4 Uncertainty in Domestic Supply ................................................................................................................ 31 3.4.1. Modelling Supply Shocks and Risk Aversion .......................................................................... 32 3.4.2. Comparative Statics .......................................................................................................................... 34 4. Conclusion & Remarks ........................................................................................................................... 36 Appendix .......................................................................................................................................................... 39 Proof I ................................................................................................................................................................. 39 Proof II ................................................................................................................................................................ 39 Proof III .............................................................................................................................................................. 39 Derivation I ....................................................................................................................................................... 40 Data Set I ............................................................................................................................................................ 42 References & Bibliography ....................................................................................................................... 43 List of Abbreviations CAP Common Agricultural Policy const. constant e.g. exempli gratia (lat.) EQ Equilibrium EU European Union FOC first order condition i.e. id est (lat.) MC marginal cost MR marginal revenue Mt megaton [metric] R&D research and development SOC second order condition SPNE subgame perfect Nash equilibrium US United States of America iii Table of Figures Figure 1: Export Quantity in Mt of Cereals in Selected Regions [Data from FAOSTAT] .................... 4 Figure 2: Partial Market Autarky Equilibrium under Perfect Competition with Exemplary Functions .............................................................................................................................................................................. 7 Figure 3: Free Trade Equilibrium Implied by Excess Curves in the World Market ............................ 10 Figure 4: Welfare and Quantity Effects of Free Trade in the Domestic Economy................................ 11 Figure 5: Post-Subsidy Welfare in Domestic Economy ................................................................................... 13 Figure 6: Game Structure ............................................................................................................................................ 17 Figure 7: Cournot Diagram with Pre- and Post-Subsidy EQ under Const. MC ...................................... 21 Figure 8: Accelerating Effect on Quantities in Falling MC Structure ......................................................... 29 Figure 9: Supply Shocks on Domestic Production - Pre- and Post-Subsidy ........................................... 33 iv